Hong Kong: The Rising Digital Finance Hub

[Xangle Digest]

※ This article contains content originally published by a third party on July 13, 2023. Please refer to the bottom of the article for the copyright notice regarding this content. 

Table of Contents

Hong Kong is active. But is it attractive?
Government Policy History: Retaking the leap to become a Digital Finance Hub
VASP License Requirements: Several Challenges on the Horizon
Taxation: No benefits, but sufficient tax system
Hong Kong: Attractive, but risks remain

 

 

 

 

 

 

Hong Kong is active. But is it attractive?

As previously reported, Hong Kong is stepping up its game in the blockchain market. However, Hong Kong isn't alone - many other nations are also paying close attention to the blockchain industry. Currently, Hong Kong, Singapore, and Dubai are prominent Asian countries demonstrating a proactive stance toward the blockchain market on a governmental level. These countries share a generally open attitude towards new markets, yet each applies its own regulatory measures and government policies.

When a Web3 project is considering expansion in Asia, it must carefully consider 1) each country's history of government policies, 2) the Virtual Asset Service Provider (VASP) system, and 3) tax benefits such as corporate tax rates. This report will help teams contemplating a move to Hong Kong by analyzing the key aspects of Hong Kong's blockchain market.

 

Government Policy History: Retaking the leap to become a Digital Finance Hub

Hong Kong and China share a history that cannot be separated. Upon its return to China from Britain in 1997, Hong Kong was promised a "One Country Two Systems" system by the Chinese government that would guarantee its independence in the political, economic, and social spheres for 50 years. However, recent Chinese moves to revise Hong Kong's electoral system, among other controlling measures, have led to Hong Kong's exclusion from global economic freedom evaluations. Amid these risks, known as the 'China Risk,' companies have begun to leave Hong Kong, no longer viewing it as a safe financial hub.

Despite this, Hong Kong is actively striving to attract virtual asset and blockchain companies. The Securities and Futures Commission (SFC) of Hong Kong started accepting Virtual Asset Trading Platform (VATP) applications from June 1. The government is also demonstrating its support by allocating a budget to the Web3 sector. Through these active strategies, Hong Kong aspires to rebound as a digital financial hub and potentially serve as a testing ground for virtual asset trading in mainland China. However, the lingering 'China Risk' within Hong Kong still remains a point of caution.

 

VASP License Requirements: Several Challenges on the Horizon

Hong Kong is currently accepting VATP applications from retail investors. Virtual Asset Service Provider (VASP) is a broader concept that includes VATP, and VATP is currently the only virtual asset-related service regulated under the VASP system in Hong Kong. The following criteria must be met to comply with two relevant laws in Hong Kong: 1) Securities and Futures Ordinance (SFO), and 2) Anti-Money Laundering and Counter-Terrorist Financing Ordinance for VASP (AMLO VASP).

1) Minimum CapitalA

minimum capital of 5 million Hong Kong dollars must be maintained, and liquid capital must remain above 3 million Hong Kong dollars. Any drastic changes in liquid capital or other red flags must be reported to the SFC.

2) Operational Committee Standards

An operational committee comprised of executives from key areas like business and security must be established. The criteria for approving and reviewing virtual assets must be set and transparently disclosed on the company's website. Furthermore, any decisions made by the committee must be documented with supporting reasons.

3) Designating Responsible Officers

At least two responsible officers (ROs) meeting specific qualifications are required. Each must satisfy one of three options, each of which has different requirements. Common requirements include having a degree or experience in a designated field, having industry experience in recent years, and passing a qualification test conducted by the HKSI.

4) Token Listing Criteria

Not all tokens can be listed; only non-security tokens not classified as 'securities' under the SFO are eligible. To ensure liquidity, only major tokens included in at least two different indices can be listed. However, the de-indexing of a token does not automatically suspend trading in that token, but rather requires evaluation as to whether traders are particularly disadvantaged due to it.

5) Trading Qualification Evaluation

Measures must be in place to prevent non-Hong Kong residents from trading by blocking IP circumvention. Before opening an account, the customer's knowledge of virtual asset investment must be assessed. The client's financial situation and investment goals must also be verified. These criteria are similar to what you'd check before trading a typical security.

6) On/Off Ramp

Cryptocurrencies can be purchased with fiat currencies. For this, the Hong Kong regulatory authorities are requesting active support from each bank. Currently, it seems that stablecoins will not be usable until they become a regulatory target of the Hong Kong Monetary Authority (HKMA). However, HKMA aims to establish relevant regulations by 2024, so stablecoins are expected to be used in the future.

 

Summary of Requirements

The prerequisites for obtaining a VATP license are primarily focused on investor protection. Although they look similar to typical financial industry licensing requirements, there are a few notable exceptions: 1) Indices are used to assess sufficient liquidity for token listing criteria, and 2) It is not possible to sell derivatives based on virtual assets. These unique factors may limit the number of tokens that can be listed and make high-return derivatives impossible. This might make the Hong Kong VATP market unattractive to retail investors during the early stages, who may continue to use other platforms through methods like IP evasion. However, as the market matures, the level of investor protection is expected to gradually ease, naturally resolving these issues.

 

Taxation: No benefits, but sufficient tax system

There's no system in place for granting tax breaks to companies obtaining VATP licenses in Hong Kong, so they must comply with the local tax system. The corporate tax rate in Hong Kong is 16.5%, with a preferential rate of 8.25% applied up to a net taxable profit of 2 million Hong Kong dollars. Hong Kong doesn't tax capital gains, dividend income, or interest income, and income from foreign sources is not taxed. This makes it an attractive base for financial businesses among Asian countries.

Also, the Hong Kong government is expected to continue supporting policies for the development of the Web 3.0 sector. Even if there aren't direct tax benefits, it's expected that there will be other indirect methods.

Source: Unsplash (Ruslan Bardash)

 

Hong Kong: Attractive, but risks remain

Hong Kong has been unable to prevent the outflow of financial companies due to 'China risk' and is actively engaging in the virtual asset market to leap again as a financial hub. As such, it is currently accepting VATP license applications. However, due to stringent investor protection requirements, investors might not find the launched platforms appealing. From the perspective of Web 3.0 projects, business won't only be conducted within the Hong Kong market, and under favorable tax regulations, it would be wise to use Hong Kong as a base for focusing on overseas businesses during the early stages of the market. But, the lingering 'China risk' that these policy directions could change remains the biggest obstacle for Web 3.0 projects entering Hong Kong, and this factor should be considered when deciding to enter the Hong Kong market.

 

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